Gold fell more than 2 per cent Thursday, its biggest one-day drop in more than three weeks, on waning investor appetite and some anticipation of interest rate hikes, which would make zero-yield gold less appealing.

Investors have recently opted to buy investments seen as riskier such as equities and industrial commodities at the expense of bullion. The S&P 500 index traded above the 1,300 level for the first time since September 2008 on strong corporate earnings.

"The pending home sales looked very good, and there are concerns about inflation. Just the threat of the Fed raising the slightest amount of interest rate will have a tremendous negative effect on gold," said Miguel Perez-Santalla, vice president of Heraeus Precious Metals Management.

Positive U.S. housing and factory data and a warning about inflation by a European Central Bank official kindled speculation that some major economies would move to raise interest rates sooner than previously thought.

Spot gold fell as low as $1,310.99 an ounce, the weakest price since Oct. 5. It was down 2.5 per cent at $1,313.30 at 2:32 p.m. EST. U.S. gold futures for February delivery settled down $14.60 or 1.1 per cent at $1,318.40.

Silver fell 2.8 per cent to $26.83 an ounce.

Investor selling has helped pressure silver prices more than 11 per cent so far this month, taking the gold:silver ratio - the number of silver ounces needed to buy an ounce of gold - to its highest since late November this month.

U.S. COMEX gold futures volume totaled about 370,000 lots, about two-thirds higher than its 30-day average, preliminary Reuters data showed. Turnover was in line with recent higher volume this week when prices tumbled.

Traders also cited busy contract switching from the current benchmark February contract to April ahead of the start of February delivery notices next Monday.

After a relatively steady morning, bullion abruptly dropped late in the New York session in tandem with crude oil as euro erased gains after initially setting a two-month high against the dollar.

While some question whether the metal's multi-year bull run is running out of steam, bullion has managed to resume its rally each time after a significant decline during the past 10 years. Gold is about $120 below its all time high of $1,430.95 set Dec. 7.

Gold has lost more than 7 per cent in January, which would be its first monthly decline in six months. Gold's technical picture appeared to deteriorate after breaking below key 50- and 100-day moving averages.

Dennis Gartman, publisher of the Gartman Letter, said Thursday that spot gold's 150-day moving average at $1,307 an ounce should offer support, but he expected bullion to fall further to its long-term trendline at an area from $1,279 to $1,290 an ounce.

In addition, open interest in COMEX gold futures declined further on Wednesday, down about 3 per cent to below 500,000 lots, following a 14 per cent decline on Monday as investors liquidated long positions.

"The confluence of selling from these various categories has all the characteristics of capitulation," said Tom Pawlicki, MF Global's precious metals and energy analyst.

Platinum dropped 1.5 per cent to $1,782.40 an ounce, while palladium lost 1 per cent to $804.500.

Elsewhere, copper climbed to within 3.5 per cent of its all-time peak on Thursday, bucking general commodity weakness and another large build in London inventories and instead reflecting its role as a main beneficiary of global demand growth.

Tin extended its record-setting run on the London Metal Exchange, hitting a new high at $29,300 a tonne on mounting supply fears in major exporter Indonesia, while aluminum posted its biggest one-day advance in three weeks as traders priced in a narrower market surplus.

LME copper for three-month delivery rallied $191 to finish at $9,441 a tonne, just $340 away from its Jan. 19 record at $9,781.

The economically sensitive industrial metal pushed higher on the supportive tone from the U.S. Federal Reserve on Wednesday, which indicated no intention to back away from its loose monetary policy.

"It's a bit of a carry-over from the Fed," Peter Buchanan, a commodities analyst and senior economist at CIBC in Toronto, said of copper's firmer tone. "The Fed indicated that it is going to continue with its QE2 program ... and I think we are just generally seeing some optimism in recent days over the global economy's prospects for 2011."

COMEX March copper on the New York Mercantile Exchange jumped 7.15 cents, or 1.7 per cent, to settle at $4.3385 per pound, near the upper end of its $4.2755 to $4.3555 session range.

Technicians eyed short-term technical resistance at the contract's 20-day moving average as a critical step to overcome before pushing back up to record highs near $4.50.

Oil fell Thursday on talk of more OPEC output to cool prices and a rise in U.S. jobless claims, even as tight North Sea supplies and investor momentum helped push Brent's premium U.S. crude to a two-year peak.

Brent fell back from an intraday high of $98.95 per barrel after U.S. jobless claims and durable goods data pointed to an erratic economic recovery and the Kuwaiti oil company chief said OPEC may need to boost output as high oil prices threaten the economy.

The head of the International Energy Agency later said he believed Saudi Arabia's output was more than reported.

In London, ICE Brent crude for Marchfell 52 cents to settle at $97.39 a barrel.

U.S. crude oil for Marchfell $1.69, or 1.92 per cent, to settle at $85.64 a barrel, after breaking through a technical support above $86.

"The jobless claims data raises significant doubt about the recent embrace of the notion of strong economic recovery. The durable goods report did not help the bullish case either," said John Kilduff, partner at Again Capital LLC.

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